This last issue for 2004 is also a special issue celebrating microfinance. The United Nations has designated 2005 the International Year of Microcredit. According to the official UN statement, ‘the International Year of Microcredit 2005 underscores the importance of microfinance as an integral part of our collective effort to meet the Millennium Development Goals. Together, we can and must build inclusive financial systems that help people improve their lives’. The international microfinance community has made a commitment to reach 100 million of the poorest people throughout the world by 2005. The Millennium Development Goals (MDGs) have posed additional challenges to microfinance institutions (MFIs), relying increasingly on microfinance to assist countries in achieving some of the MDG welfare indicators.
In a special issue of the IDS Bulletin on microfinance, poverty and social performance, Martin Greeley observes that microfinance is now in its third decade. He argues that during this period microfinance has contributed to the achievement of development objectives in mainly two ways: the first being its contribution to poverty reduction through strengthening households' capacity to improve their livelihoods; and, second, via its contribution to the establishment of functional financial markets.
In South Africa, after a decade of focusing on microcredit for formal small enterprise, attention is beginning to turn to livelihood strategies in the informal sector – what the President has termed ‘the second economy’. The articles in this issue all relate, in one way or the other, to the impact of microfinance on poverty. There is growing evidence that microfinance can have a positive impact on both the economic and social conditions of the poor.
To put it all in perspective, the first article provides an overview of the impact of the South African government's small business support programmes. The author questions the impact of such programmes on the bottom end of the market, i.e. the informal sector. The next article explores empirically why South Africa's MFIs are under pressure to move upmarket, away from a focus on livelihood strategies in the informal sector. This is due to a number of factors, including the conditions imposed on MFIs by Khula Enterprise Finance, the government's microfinance wholesaler. The main reason, however, is South Africa's extreme income inequality, which makes the costs of ‘doing microcredit’ in South Africa amongst the highest in the world.
The third article shares insights from an impact study done on Khula itself, while the fourth reviews the reasons for the failure of an MFI, Nkwe Enterprise Finance. Nkwe was created to fund microenterprises in the North West province, but suspended its operations after only two years. The article provides a critical analysis of the life of Nkwe, and shares important lessons for wholesalers, other MFIs and commercial funders.
The so-called formal or registered microcredit sector is the theme of the next article, and is based on data recorded by the Micro Finance Regulatory Council (MFRC). The author reviews the supply of microcredit, as well as the demand side: who are the clients and what are they using credit for? Moving from the formal to the informal, the next article is based on the activities of 657 informal, unregistered moneylenders. These tiny enterprises, all in the poorest parts of the country, share details about how they are organised, how they market themselves, and their income.
The last article moves beyond South Africa, and shares the experiences of two apex or wholesale institutions, one in Tanzania and one in Senegal. Both were created to provide wholesale loan finance via MFIs to disadvantaged women's groups in urban and peri-urban areas.
This issue of Development Southern Africa comes at a time when microfinance is evolving away from sterile debates about financial versus social performance. For years, one camp has maintained that in the long term, all microfinance activity must be able to sustain itself on a commercial basis. The other has argued that the benefits of microfinance are worth subsidising and that commercial institutions will never serve the very poor.
This debate is being resolved by practical experience. A recent issue of the Small Enterprise Development Journal Footnote2 is devoted to the question of ‘impact’ in microfinance. The conclusion seems to be that trying to achieve a positive social impact on microfinance clients is not only desirable, but also necessary if MFIs are to succeed financially. MFIs who work with the very poor need to ensure that clients improve their lives with microfinance because, if not, they leave the programme – and as most businesspersons know, it is cheaper to retain existing clients than to find new ones. At the same time, it is becoming clearer that microfinance extended to the very poor does have a positive impact on their poverty status, such as increased incomes and reduced vulnerability. MFIs targeting the very poor thus have an incentive to manage their social performance; if they do, they can become self-sustaining.
If the financial/social debate is fading from the microfinance scene, two challenges remain. First, ‘pro-poor’ MFIs do not emerge spontaneously. It is difficult to serve the very poor successfully and MFIs need time to learn how to do it. Someone has to pay for the learning curve, which appears to be longer than in most businesses. This is an essential role for the state and other donors, who need to consider whether an emphasis on quick sustainability is appropriate in a weak microfinance market like that of South Africa.
The second challenge is broader, namely that microfinance alone is not an answer to poverty. Microfinance clients, like any household or business, can only make the best of the opportunities and constraints they face in the broader environment. As an intervention against poverty, microfinance, like other development tools, must be supported by a broader set of policies to improve the overall performance of the economy, and to ensure that appropriate opportunities are created for microenterprises as well as macroenterprises.
Notes
Vol. 15, No. 3, September 2004.